Category Archives: Economics

Is Good Corporate Citizenship At An All Time Low?

In yesterday’s post we noted that “working capital has bounced back” in Europe and that Europe’s biggest companies have seen the most significant revenue growth in five years. We also noted that, at the same time, these same companies are hoarding their cash and, in many cases, borrowing to do so, while smaller companies remain starved for capital and unemployment remains near 10% in the EU. And SI stated that this is, in its view, disgusting. A lack of jobs is resulting in significantly reduced spending across the board because the people out of work can’t spend while the rest of the people are fearing that they are next on the chopping block given that it’s been all bad news in the job market for a few years now. This reduced spending has significantly contributed to the global economic decline which has brought entire countries to the brink of defaulting on their (sovereign) debt.

Now, as per this recent article over on BNet on how “bad corporate management is killing the economy”, we find out, from a recent study by CFO Magazine and REL (a division of The Hackett Group), the thousand largest companies in the US are sitting on cash reserves of 853 Billion. Given the relative equality between the power, and cash position, of US and European multinationals these days, it’s probably a safe bet to say that the Global 2000 is probably sitting on 1.5 Trillion in cash reserves. Now, while it may be true that this is likely not enough to solve the economic crises of the world, given that the US National Debt is almost 15 Trillion, we have to remember that there are only 11 countries in the world with a GDP greater than 1.5 Trillion. We also have to remember that the national average wage in the US is slightly under 41 K, and that this means that these companies could collectively employ another 36.5M people for one year without going into debt. To put this in perspective, at the current published unemployment rates, there are only 27.9 M unemployed people in the US and 46.8 M unemployed people in the EU. That means half of the unemployed people could be working at the top 2,000 corporations in the US and the EU. This would give effective unemployment rates of 4.5 and 4.8 in the US and the EU. The last time the unemployment rate dropped below 4.6 in the US was back in 2000, and the economy was booming.

So while it’s not an absolute that corporations can fix the economy, it should be pretty clear that the author is right and that big corporations are killing the economy when they could be the economic saviours. Instead of hoarding cash, they should be focussed on innovation and hiring bodies to propel that innovation forward. That’s how you print money in a knowledge economy, and with the current state of affairs in most public sectors and banks around the world, they are the only organization left with a license to print cash. But they have to be willing to use it.

Working Capital in Europe is at an All Time High

But yet, so is unemployment. What’s the deal? According to this recent article over on the Financial Director site (in the UK), on how “working capital bounces back”, Europe’s biggest companies have seen the most significant revenue growth in five years. However, these same companies are hoarding their cash and, in many cases, borrowing to do so, while smaller companies remain starved for capital and unemployment remains near 10%.

This is, in a word, disgusting. As SI posted last Thursday, you get nothing for nothing, so if all your company is doing is hoarding cash instead of spending it on talent and innovation, it doesn’t, at least in SI’s view, have a very bright future. Especially given the overall state of the European economy with entire countries risking default on debt. While SI doesn’t know exactly how much cash the 1000 largest Europe-headquartered public companies are hoarding, SI is sure that it’s enough to make quite a dent in the unemployment wake and economic stability of the EU — something that would be very good for global supply chains that probably can’t afford more costly hits from economic instability and the rising prices that such instability entails.

Buy India, Sell China?

A recent article on Fortune on “Another Global Recession? Buy India, Sell China” caught my attention because, while I think China is over-hyped, I’m not sure India is ready for prime yet due to their infrastructure problems and the issues with getting freight from even a few hundred miles inland in many parts of the country. China still has problems, but they have been investing Billions to improve their infrastructure in recent years and making progress at a rapid rate whereas India, with twenty-eight states and seven union territories, and 22 languages of official status, has been slow to tackle their logistics challenges due to the very long timeframes it takes to get agreements on projects of a national scale. (It probably doesn’t help that the Republic of India is a federation with a parliamentary system that was based on that of Great Britain, where some projects take so long that they literally cross career life-spans!)

So why is the article recommending to Buy India, and Sell China? According to the authors, even though BRIC countries are growing at a rapid rate, countries like Brazil and China are doing so at the expense of other countries — primarily by supplying the global economy with raw materials and manufacturing. If major financial crises (continue to) materialize in the US and the EU, and global demand slumps significantly, these countries are going to get hit the hardest and the growth-rates of nearly 10% will be unsustainable. (And depending on which fear-monger you ask, growth could come to a screeching halt.) And this doesn’t even take into account the deep financial exposure China has to troubled regions through its massive foreign exchange reserves.

On the other hand, poorer, insulated economies like India are in much better shape to weather the storm and, in some economists’ views, even see a silver lining if major obstacles (such as nosebleed inflation rates) decline or disappear.

I have to agree, but only to a point. China is experiencing a rapid rise in its middle class at home and the local economy is booming as well. Plus it has a very aggressive five year plan, and a history of meeting those five year plans. While it will get hit hard, and probably drop down to a growth rate of 5% if a double-dip global recession hits us (just like its growth rate fell from 13% in 2007 to 6.8% in 2008), it will continue to grow and, more importantly, will likely be the first to recover when the double-dip recession ends (if it does hit us).

In other words, if you are one of the few investors left with the brains to take a long term view, don’t count China out yet. It may experience a few bumps, but it will figure out how to smooth them over as it builds its global highways. Moreover, if you’re looking to get rich quick, it will likely be another decade before India provides you with that opportunity. If you’re patient, I believe you can win with both economies.

Energy Buying Is Definitely Not For Those Looking for a Quiet — or Easy — Life

A recent article over on the CPO Agenda on how “energy buying is not for those looking for a quiet life” made some great points. As the article notes:

  • there is continuing political unrest in many oil-producing nations (and 20%+ of available oil goes to international shipping alone [Source])
  • the recent Japanese disaster has cause a renewed apprehension to nuclear energy production (and Germany is going to decommission its nuclear plants that supply 25% of the country’s electricity)
  • in most countries, renewable sources still account for less than 5% of electricity production
  • demand for fossil fuels is still rising, and the rapid rise of China and India which, combined, hold over 1/3 of the planet’s population combined, isn’t helping

Plus:

  • significantly increasing energy production from renewable sources, while now a technical feasibility, will cost many (many) Trillions of dollars which have to come from somewhere (as a side note, 2010 saw a record level of investment of over 240 Billion — but we probably need at least 10 times that for a rapid increase in the production of renewable power)
  • deregulated energy markets, which will soon account for a majority of state markets in the US, allow money grubbing financial types to play hedge games (and we know what eventually happens to hedge markets when Wall Street types get involved)

And:

  • energy cost models can be complex: costs of generation, transmission, storage, distribution over third party networks, and taxation, each with their own cost models, need to be taken into account

All-in-all, you are dealing with a very complex, and very volatile, commodity whose price performance can be almost impossible to predict even in the short term. And even if you manage to lock in a mid-term contract at great rates, what happens if prices spike and your provider goes bankrupt because it predicted downward performance and signed too many deals at the start of what was actually an upward trend? Or if you decide to generate your own electricity and your fuel supplier all of a sudden stops delivering? There will be sleepless nights. Unless you thrive on them, beware of energy buying. It’s not for the faint of heart.

What China’s Five Year Plan Ultimately Means for Your Business

If you are sourcing from China because it is part of your LCCS (Low-Cost Country Sourcing) Strategy, you will need to find a new low cost country to source from. Just like India is no longer a low cost country for call centers and outsourced support, it won’t be long before China is no longer a low cost country for manufacturing. As clearly pointed out in this recent McKinsey Quarterly article on “What China’s five-year plan means for business”, the plan targets:

  • a 13% increase in minimum wages each year,
  • an annual increase in household income of 7% each year,
  • new policies for pricing energy, raw materials, and water … that will increase costs further … and
  • tighter environmental regulations … that will increase costs even further.

In other words, your labor costs will be 84% higher within five years. And your raw material and environmental disposals cost will likely see a comparative price increase. Low Cost Country? Not anymore!